Westlake Corp

NYSE:WLK

Earnings Call Analysis

Westlake's Q3 Results: Balanced Strategy Amid Challenges

Westlake ended Q3 of 2023 with $3.1 billion in cash, a solid cash flow generation showcased by a free cash flow of $451 million, despite a debt of $4.9 billion. The firm anticipates Q4 revenues for Housing and Infrastructure Products to range between $875 million and $975 million, with mid-teens EBITDA margins. Savings of $95-$110 million are expected in 2023, and capital expenditures should be steady at $1 billion. High inflation and interest rates continue to pressure consumer demand, yet low customer inventories and pricing momentum might ease destocking impacts. The company's strategic focus remains on its competitive edge and shareholder value, evidenced by a doubled quarterly dividend over five years and a significant 18% reduction in CO2 emissions intensity since 2016.

Strategic Financial Movements and Guidance

In the third quarter of 2023, the company observed a $96 million decrease in EBITDA from the previous quarter, totaling $339 million. This decline was driven by a combination of factors including lower average selling prices, especially for caustic soda, PVC resin, and epoxy, higher input costs for feedstock and energy, and certain unspecified charges. Despite an increased sales volume for PVC resin and polyethylene, these improvements were insufficient to outweigh the negative influences affecting profitability. Furthermore, net sales in the company's Performance Materials and Equipment (PEM) segment followed a downtrend, dipping 8% in comparison to the second quarter as volume gains were eclipsed by price decreases and additional charges, leading to diminished segment earnings.

Market Positioning and External Factors

The U.S. PVC market is influenced by domestic housing construction and the global economy, with approximately a third of its production geared toward exports. The United States boasts the lowest production costs globally for PVC, thanks to inexpensive natural gas used in chlor-alkali production and ethane as the primary feedstock for ethylene production. However, current profitability is constrained by margin pressures and China's transition away from high-cost and polluting carbide-based PVC production to an ethylene-based approach, which is inherently costlier due to reliance on naphtha from oil refining. This shift could enhance the competitive advantage of U.S.-based producers but is dependent on improvements in the Chinese construction sector and wider global economic recovery.

Inventory Management and Industry Dynamics

The company has experienced significant destocking throughout 2022, which typically precedes a notable restocking cycle. Given the high inventory carrying costs driven by rising interest rates, customers are currently procuring only what is immediately necessary. This cautious purchasing behavior provides the company with increased capacity to serve customers promptly but renders demand forecasting challenging. The company has adapted by holding more inventory, which mitigates import competition. Looking ahead, any uptick in demand could catalyze a multiplicative effect on production, although the timing of such a market rebound remains uncertain.

Capital Deployment and Demand Outlook

As the company expects to see stable and potentially improving prices for caustic soda in the following year, there is optimism for a recovery, contingent upon global economic conditions and the effects of persistently high interest rates. To ensure long-term value creation, strategic capital deployment remains a priority. For the fourth quarter, the company projects revenue in the Housing and Infrastructure Products (HIP) segment to be between $875 million and $975 million with mid-teen EBITDA margins, alongside $95 million to $110 million in cost savings for 2023. Capital expenditures are anticipated to match the depreciation and amortization run rate, approximating $1 billion for the full year.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Westlake Corporation Third Quarter 2023 Earnings Conference Call. [Operator Instructions]

As a reminder, ladies and gentlemen, this conference is being recorded today, November 2, 2023. I would now like to turn the call over to today's host, Jeff Holy, Westlake's Vice President and Treasurer. Sir, you may begin.

[Jeff Holy, executive]

Thank you, Maria. Good morning, everyone, and welcome to the Westlake Corporation conference call to discuss our third quarter 2023 results. I'm joined today by Albert Chao, our President and CEO; Steve Bender, our Executive Vice President and Chief Financial Officer; and other members of our management team.

During the call, we will refer to our 2 reporting segments, Performance and Essential Materials, which we refer to as PEM or materials and housing and infrastructure products, which we refer to as HIP or products. Today's conference call will begin with Albert, who will open with a few comments regarding Westlake's performance. Steve will then discuss our financial and operating results, after which Albert will add a few concluding comments, and we'll open the call up to questions.

Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus are subject to risks or uncertainties. These risks and uncertainties are disclosed in Westlake's Form 10-K for the year ended December 31, 2022, and other SEC filings. We encourage you to learn more about these factors that could lead our actual results to differ by reviewing these SEC filings, which are also available on our Investor Relations website.

This morning, Westlake issued a press release with details of our third quarter results. This document is available in the Press Release section of our website at westlake.com. We have also included an earnings presentation, which can be found in the Investor Relations section of that website. A replay of today's call will be available beginning today, 2 hours following the conclusion of this call. This replay may be accessed via Westlake's website.

Please note that information reported on this call speaks only as of today, November 2, 2023. And therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. Finally, I would advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on our web page at westlake.com.

Now I would like to turn the call over to Albert Chao. Albert?

[Albert Chao, executive]

Thank you, Jeff. Good morning everyone. We appreciate you joining us to discuss our third quarter 2023 results. For the third quarter of 2023, we reported sales of $3.1 billion net income of $285 million and EBITDA of $682 million, including record HIP segment EBITDA of $327 million. Our HIP segment benefited from resilient North American housing and infrastructure construction activities, while higher operating rates in our [indiscernible] segment drove sequential volume growth despite generally lower average selling prices.

The strength of our business portfolio was highlighted by the quarterly earnings achieved by our HIP segment where EBITDA exceeded the segment's previous record set in the second quarter of 2022, doing a much stronger housing and overall economic environment. HIP segment EBITDA margin of 29% was also a record, driven by our strong brands and disciplined pricing in a period of lower material costs as well as solid progress in our cost-saving initiatives.

The EBITDA generally in our HIP segment typically comes from -- with lower capital requirements than in our Penn segment and converts to cash flow generation at a higher rate. which is the additional benefit of our vertical integration and downstream diversification strategy. We will have more to say about our HIP results and outlook later in the call. But I want to congratulate all of our HIP employees on their record performance.

Overall, our third quarter results reflect the advantages of our portfolio diversification. While our Penn businesses experienced pricing pressure and margin compression, our housing and infrastructure businesses delivered dividend cost and earnings improvement. As a result, Westlake EBITDA margin of 22% was consistent with our second quarter margin of 21% and our prior year margin of 20%, demonstrating the earnings and cash flow stability of our strategy. To be a vertically integrated performance and essential materials producer, combined with our value-added portfolio of leading offerings for housing and infrastructure products.

Our consistent focus on cash flow generation enabled Westlake to deliver $696 million in cash flow from operations in the third quarter and $1.8 billion year-to-date. The solid cash flow generation, the strength in the business and our confidence in the company's future allowed us to increase our dividend by 40% in August and to return approximately $180 million to shareholders since January.

I would now like to turn our call over to Steve to provide more detail on our financial results for the third quarter of 2023.

[M. Bender, executive]

Thank you, Albert, and good morning, everyone. Westlake reported net income of $285 million or $2.20 per share in the third quarter of 2023 on sales of $3.1 billion. Net income for the third quarter of 2023 decreased $116 million from the third quarter of 2022 as a result of lower average selling prices and integrated margins as well as lower sales volumes.

When compared to the second quarter of 2023, net income decreased by $12 million in the third quarter of 2023 due primarily to lower prices and integrated margins for most of our products in our PIMS segment partially offset by higher operating rates and sales volumes.

For the third quarter of 2023, our utilization of the FIFO method of accounting had a $50 million unfavorable impact in pretax earnings compared to what earnings would have been if we reported on the LIFO method. This is only an estimate and has not been audited.

Before I discuss our segment results, I want to provide some high-level thoughts on the quarter. We were pleased with HIP segment's ability to deliver value to our customers while managing cost to produce record earnings against a challenging North American housing backdrop. These results are a testament to the strength of our brands and the importance of our products to our customers. We believe this record performance illustrates the benefits of our vertical integration and diversification strategy as lower cost of materials used in our HIP segment drove margin expansion at a time when margins in our PIMS segment compressed due to sales price decreases. The net result of this downstream integration was that Westlake delivered a 22% EBITDA margin in the third quarter compared to 21% in the second quarter and 20% in the third quarter of '22 despite a period of commodity price declines.

While we are pleased with the performance of our HIP segment, the financial results in our PIMS segment continue to reflect soft global demand, and we are taking actions to address the challenging macroeconomic conditions. We continue to implement targeted actions to deliver cost savings in 2023. We now expect our company-wide reduction -- cost reduction program to achieve $95 million to $110 million of cost savings in 2023, up from the previous $75 million to $105 million target. After we achieved approximately $80 million of cost savings to date in 2023. We are taking a prudent approach to managing costs, and capital investments in markets and regions that don't contribute to our global feedstock and energy cost advantage or a vertical integration strategy.

Moving to the specifics of our segment performance. Our Housing and Infrastructure Products segment produced record quarterly EBITDA of $327 million on $1.1 billion of sales. The solid EBITDA growth of $73 million from the previous year EBITDA of $254 million. The year-over-year increase in EBITDA was due to lower materials costs that more than offset an 8% decrease in average sales price, driving expansion in our HIP segment EBITDA margin to 29% and from 20% in the prior year period. When compared to the second quarter of 2023, HIP segment sales of $1.1 billion were driven by [ 7% ] growth in sales volume, which more than offset a 5% decrease in average sales price.

Housing product sales of $963 million in the quarter increased $45 million due to solid sales volume growth in pipe and fittings applications in siding and trim that more than offset lower average selling prices. Meanwhile, Infrastructure Product sales of $181 million in the third quarter of 2023 and decreased $16 million from the second quarter of 2023, primarily due to lower average selling prices and sales volumes in our compound business. The overall higher HIP segment sales in the third quarter of 2023, along with lower materials cost, drove an improvement in EBITDA margin to 29% from the 22% in the second quarter. As a result, HIP segment EBITDA increased $83 million from the second quarter to $327 million in the third quarter.

Turning to our performance in Essential Materials segment. Third quarter 2023 sales were $2 billion with EBITDA of $339 million. When compared to the third quarter of 2022, EBITDA fell by $222 million due to lower average selling prices, particularly for Performance Materials in addition to lower sales volume, largely in epoxy driven by weak global demand and increased competition from Asian imports. PIMS segment EBITDA of $339 million in the third quarter decreased $96 million from the second quarter of 2023 as improved sales volumes, particularly for PVC resin and polyethylene were more than offset by a combination of lower average selling prices, particularly for caustic soda, PVC resin and Epoxy, higher feedstock and energy cost and certain charges.

Net sales in our PIMS segment in the third quarter were 8% lower sequentially as volume gains over the second quarter were more than offset by price declines, which coupled with certain charges drove a decline in segment earnings. As the quarter progressed, we saw a modest improvement in pricing in some markets such as PVC and polyethylene while other markets continue to face pricing pressure. Our PIMS segment is globally competitive with a well-invested, vertically integrated position, processing a low-cost feedstock as we continue to grow our specialty and differentiated product offerings.

Shifting to our balance sheet. As of September 30, 2023, cash and cash equivalents were $3.1 billion and total debt was $4.9 billion with a staggered long-term fixed rate debt maturity schedule. For the third quarter of 2023, net cash provided by operating activities was $696 million, while capital expenditures were $245 million resulting in free cash flow of $451 million, which reflects our strong cash generative business model. We continue to look for opportunities to strategically deploy our balance sheet in order to create long-term value.

Now let me provide some guidance for your models. Based on the current view of demand and prices and taking into account typical seasonality, we expect fourth quarter revenue in our Housing and Infrastructure Products segment to between $875 million to $975 million with EBITDA margins in the mid-teens. We also expect the $95 million to $110 million of savings in 2023 that I previously mentioned. We continue to expect total cap expenditures for 2023 to be approximately $1 billion, which is unchanged from our earlier guidance and is similar to our depreciation and amortization run rate. For the full year of 2023, we now expect our effective tax rate to be approximately 21%, which we will continue to expect our cash interest expense to be approximately $160 million.

Now I'll turn the call back over to Albert to provide a current outlook of our business. Albert?

[Albert Chao, executive]

Thank you, Steve. Entering the fourth quarter, the economic backdrop remains challenging. The rate of inflation remains high and the mortgage rates are at the highest level in over 20 years. These inflationary and affordability pressures are negatively impacting consumer and housing demand. This volatile economic backdrop, combined with ongoing geopolitical turmoil and a normal seasonal decline in demand, leads us to expect challenging conditions to continue throughout the fourth quarter. The uncertain macroeconomic outlook makes it difficult to predict demand trends over the next several quarters.

That said, we believe that customer inventories are much lower today than they were at this time last year, which combined with the recent pricing momentum in some of our key products should reduce the degree of customer destocking activity in both our PIM and HIP segments relative to what we experienced in the fourth quarter of last year. As we head into 2024, our leading market position with a broad product portfolio and strong brands, combined with our globally advantaged low-cost position, enable Westlake to respond to evolving market trends while executing our business strategies.

Westlake has demonstrated a solid cash generative nature of our business. resulting in $2.6 billion in cash flow from operations on a trailing 12-month basis. We will continue to maintain a strong balance sheet and invest in our long-term strategic priorities while continuing to return capital to shareholders. Notably, our quarterly dividend has doubled over the last 5 years as a testament to our commitment to returning value to our shareholders. We are also reaffirming our commitment to our broader stakeholder community to improve the sustainability of our products and operations. We continue to introduce new products into the market to meet customers' sustainability requirements.

In September, we are pleased to introduce our pivotal line of One Pellet Solutions. This innovative portfolio of products incorporates up to 45% post-consumer recycled material into resin pellets with properties comparable to that of virgin resin. The product line has already achieved green circle certification, which independently validates our post-consumer recycled content efforts, and we're seeing increasing interest from our customers for this more sustainable material. Separately, I'm pleased to announce that we have achieved an 18% reduction in our scope 1 and scope 2 to CO2 emissions intensities since 2016, moving lastly closer to our goal of a 20% reduction by 2030, as we continue to achieve significant progress, we will look for opportunities to increase our emission intensity reduction goals.

Before we open the call to our questions, I want to provide some closing thoughts on the third quarter and our outlook. Our third quarter results highlight the benefits of our vertical integration and downstream diversification strategy. A key component of the strategy is the goal to reduce volatility earnings and cash flow, all maximizing growth potential Recognizing that profitability can shift up or down the value chain. Depending on economic conditions, we believe that it's important to have a broad product portfolio with strong brands supported by a manufacturing culture focused on low-cost operational excellence.

In the third quarter, this strategy proved very beneficial as profitability moved to our downstream HIP businesses. Through the investment that we have made in our Hip segment in recent years, we're able to capture this value shift to enhance the stability of our EBITDA margin and cash flows. As we look forward, we seek additional ways to broaden our business through organically and through acquisitions to further this strategy. Thank you very much for listening to our third quarter earnings call.

I will now turn the call back over to Jeff.

[Jeff Holy, executive]

Thank you, Albert. Before we begin taking questions, I would like to remind listeners that our earnings presentation is available on our website, and a replay of this teleconference will be available starting 2 hours after this call has ended. Maria, we will now take questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Patrick Cunningham from Citi.

[Patrick Cunningham, analyst]

What drove the pricing declines in the HIP segment for the quarter? Was it broad-based? Or are there any specific areas of pricing pressure to highlight? And sort of any sort of outlook into 4Q and into next year would be helpful.

[M. Bender, executive]

Yes. So when you think about some of the pricing decline, we saw certainly we're seeing certainly in pockets and some of these portfolio offerings where there is pressure. Certainly, you can see when you think about the quarter compared to second quarter, we certainly had nice volume pickup, 7% volume pickup over Q2. But certainly, as we all know, affordability is an issue in the housing sector. And so certainly, to continue to be performing very solidly as we did, in fact, record results. There is some pressure in certain segments within that portfolio within HIP.

[Patrick Cunningham, analyst]

Got it. And then just a similar follow-up. I appreciate the sales and EBITDA guide for the HIP segment. The narrower 4Q sales range seems to point maybe towards the bottom end of your previous range. Is this some indication that the business might be more challenged beyond just what you would expect from typical seasonality? Or are there any other negative trends to point to there?

[M. Bender, executive]

Well, it is a combination, Patrick, of both seasonal play plus we've seen certainly the compounding effect of interest rates and impacting affordability. But certainly, it's a combination of both that impact of rising interest rates for mortgages and certainly a seasonal play. So that's really the 2 primary drivers within the guidance that we've provided.

[Operator]

Our next question comes from the line of Frank Mitsch from Fermium Research.

[Frank Mitsch, analyst]

If I could follow up on HIP. Obviously, very impressive EBITDA margins of 29% in the third quarter. And based on your guidance, it looks like the year is probably going to come in close to like 22% or so for the full year, which is up 200 bps from last year. How do you think about normalized EBITDA margins in HIP as you look out into '24 and beyond?

[M. Bender, executive]

Yes, Frank, good question. And certainly, I think you see from the strong portfolio offering that we had and the acceptance by our broad customer base that we continue to perform even very well in a period of rising interest rates. And so I think the portfolio we offer does provide an ability to deliver really strong and compelling EBITDA margins in this business. It is a combination of what I would call exterior building products. Of course, our infrastructure products going into some of the infrastructure markets that we're seeing, both pipes and fittings, and of course, our portfolio adds compounds, which goes into a variety of applications, whether it is building wire or other applications in automotive or medical. So it's a broad portfolio offering. And I think the portfolio will offer attracts, I think, the kind of good margins that you see even in the face of these strong headwinds we've seen given interest rates and some of the pricing pressures. So I do believe that it's performing incredibly well, and we expect it to continue to be strongly performing.

[Frank Mitsch, analyst]

That's helpful -- yes, go ahead, please.

[Albert Chao, executive]

Its Albert, I just want to comment that, I think, Steve, in the past have all said, our target for the HIP business EBITDA margin is the high teens. Now it can go up and down depending on the time of the season, usually, it's maybe higher second and third quarter, lower first and fourth quarter.

[Frank Mitsch, analyst]

Understood. And then obviously, then this does appear to be somewhat of an anomalous year, and I was trying to get at that. But I also think that the cost improvement that you've talked about, you've raised your target for the year fairly significantly. You did $80 million year-to-date. How much of that cost improvement is coming from the HIP segment versus PIM?

[M. Bender, executive]

It's actually well across the portfolio, everything from procurement opportunities in both PIM and in HIP as well as logistics opportunities. So it really is across both segments roughly, let's say, equally so.

[Operator]

Our next question comes from the line of Aleksey Yefremov from KeyBanc Capital Markets.

[Ryan Weis, analyst]

Great. This is Ryan on for Aleksey. My first question would be around current dynamics in chlor-alkali. Have recent capacity reductions by some of your peers had a positive impact on the market thus far? And are there any areas like where you're seeing incremental demand for your product?

[Albert Chao, executive]

Yes. As we know that chlorine, the biggest of use chlorine is for PVC and the biggest user of PVC is construction. And as Steve mentioned, not only we are impacted by the high interest rate, high mortgage rate impacted affordability on new housing and also on the repair remodeling activities, but also seasonality is impacting it. So I think the operating rate tends to go down for both PVC and for chlorine and chlor-alkali especially in the fourth quarter and maybe even part of the first quarter.

[Ryan Weis, analyst]

Helpful. And then can you just talk about what you're seeing in the epoxy market seems like there might have been some stability in prices here in October, albeit it's at a low level, and it seems like costs are kind of continuing to get at margins. Just any commentary you can give us there would be much appreciated.

[Albert Chao, executive]

Yes. As Steve mentioned, that our epoxy business is impacted by imports of both Asian imports to Europe and Asian imports to U.S. And the prices both in Europe and U.S. have dropped and very close now to the imported price. So we see some stability even though the margin is pretty poor.

[Operator]

Our next question comes from the line of Bhavesh Lodaya from BMO Capital Markets.

[Bhavesh Lodaya, analyst]

Yes, this is Bhavesh for John. Congrats on the quarter and the continued outperformance on the HIP segment. If I compare your performance in HIP this year versus last -- during the quarter, so volumes are roughly flat, and your margins are up 8% year-over-year. Is that all price versus cost? Or is there an element of changes in the product mix of what you are selling?

[M. Bender, executive]

No. So when you think about year-over-year results, of course, you're right, volumes are flat, but I would say that given the headwinds we've seen related to affordability driven by higher rates, it really is, I think, a testament to the strength of the portfolio offered. Obviously, we've seen some pressure on price either quarter-over-quarter or year-over-year. But nevertheless, I think the strength relative to the year-over-year with '22, a much stronger year than '23 is a testament to really the strength that we have with our customers and the offerings that HIP does provide. I think if you think about the performance we had quarter-over-quarter, a nice pickup in volume of 7% from 2Q to 3Q, which tells you even in this market that we've seen, we're right where rates are at 8%-plus from 30-year mortgages, still strong performance from a volume perspective in the portfolio in our HIP business.

[Bhavesh Lodaya, analyst]

Got it. And then a question on the PE markets here. So we have seen international prices move higher in line with the feedstocks and pretty heavy volumes going from the U.S. into exports in general. How do you see the mix going ahead? And any color on your outlook for PE pricing here?

[Albert Chao, executive]

Yes. The U.S. industry is exporting in the high 40-odd percent in polyethylene. And with new additional capacity coming up U.S. local demand, domestic demand cannot absorb the capacities. So I think as the new capacity comes up, more export, more volume will be exported, which has come to a lower price, of course.

[Operator]

Our next question comes from the line of Matthew Blair from TPH.

[Matthew Blair, analyst]

With $3.1 billion of cash, could you assess the M&A landscape? What kind of areas would you be interested in adding in? And is it fair to think that if you did make an acquisition it's more likely that would be in HIP than PIM?

[M. Bender, executive]

Matthew, it's Steve. I would say that as we look across the landscape, we look equally hard at both the material side in our PIMS segment as well as in our building products space. We're looking for opportunities where there is compelling value, good compelling synergies that are immediately accretive to the bottom line. And so as you've seen, we're willing to invest where we find the right opportunities as we have over the last year or two. But we're looking for opportunities in both segments, not necessarily focusing on 1 or the other, but those that really drive real value at the bottom line. And while we do have cash on the balance sheet, it doesn't compel us to really go out and do just a transaction to spend that cash. It's incredibly easy to spend the cash. It's always more challenging to get the return. And as you know, we're really focused on that return basis. So that's where our focus will be as synergistic opportunities on either the hip or the PIMS segment, and we'll continue to look for those.

[Matthew Blair, analyst]

Sounds good. And then, Steve, you mentioned the raw material tailwinds in HIP. Would that be PVC? And if so, are there any other raws that helped you out in the quarter? And also, were there any onetime boost in HIP?

[M. Bender, executive]

The impact on the onetime items were -- or the period items were really all in PIM. And as it relates to the reduction in inputs, it was really vinyl. We've seen actually that being the biggest input that had a benefit to the contribution of margin expansion in the hip business.

[Operator]

Our next question comes from the line of Michael Sison from Wells Fargo.

[M. Bender, executive]

Maria, maybe we put Mike back in the queue, and let's take the next question.

[Operator]

Our next question comes from the line of Arun Viswanathan from RBC Capital Markets.

[M. Bender, executive]

Arun are you there?

Maria, do we have a connectivity issue?

[Operator]

Not that I am seeing, I -- everything looks clear. Do we want to try to go on to the next person?

[M. Bender, executive]

Yes. Let's put Arun also in the next que and let's go to the next question.

[Operator]

Our next question comes from the line of David Begleiter from Deutsche Bank.

[David Begleiter, analyst]

Thank you. Can you hear me?

[M. Bender, executive]

Yes, David, we can.

[David Begleiter, analyst]

Thank you. You mentioned some in PIM some onetime impacts in the quarter. How much were they in -- should they all be a tailwind into Q4? And are there any other one-timers in Q4?

[M. Bender, executive]

David, I see none at this stage in terms of impacts in Q4. And I would say these all were attributable to the PIMS segment, and this was a $20 million item that we called out.

[David Begleiter, analyst]

Very good. And Albert and Steve, looking at '24, do you have an early view on HIP volumes next year given the weakness you're seeing in North American construction.

[Albert Chao, executive]

Yes. We expect the HIP -- General Housing industry to still be impacted by the high mortgage rate, high interest rate. So until the Fed start lowering rates, we don't see any recovery in housing demand or in building-related demand.

[David Begleiter, analyst]

So would you expect your volumes to be down next year in HIP?

[Albert Chao, executive]

Possibly.

[Operator]

Our next question comes from the line of Duffy Fisher from Goldman Sachs.

[Unknown Analyst]

Question around epoxy. With the oversupply we're seeing largely out of China, which of your end markets are being impacted by that, which are not? And have you seen kind of a change in global trade flows for Epoxy?

[Albert Chao, executive]

I think the coatings generally are the largest market for epoxy and as well as areas such as composite and wind mills I think, generally, China has the largest capacity in the world by a big stretch over the next producer. And the economy in China really has not recovered, even though government has put in several steps of incentives. Again, we're heading into the winter season and things are slowing down in China as well. So I think it's -- the impact is across the board in all epoxy activities.

[Unknown Analyst]

Okay. And then do you think the industry, if we roughly stay at these levels because you talked about construction may still struggling next year, does the industry need to do something strategic? Meaning, are people running kind of below cash breakeven? Do you think in some parts of the world? Or is this just something we're going to have to wait out until we get some demand rebound?

[Albert Chao, executive]

I think generally speaking, if you talk about just chemical industry or...

[Unknown Analyst]

Epoxy in general.

[Albert Chao, executive]

Yes. As I said, one of the questions earlier was where we're seeing prices. And as mentioned that prices pretty much has dropped in both U.S., European markets to meet imports. And we're seeing the imports to start slowing down as well because of the cost pressures, oil price going up and the economy is not great. And even companies in China are curtailing production or some of the plants are not running. So we are seeing people are taking actions to reduce production, reduce losses all across the world. So I think very few epoxy people we know are making any money.

[Operator]

Our next question comes from the line of Kevin McCarthy from Vertical Research Partners.

[Kevin McCarthy, analyst]

Albert, I'd appreciate your updated view of PVC resin prospects moving into 2024. The U.S. contract price seems to be trending about flat, but seems also that there's a lot of supply length in China against the backdrop of dislocated property sector there. So how do you see that playing out? Would you anticipate rationalization of capacity or throttling back? What is your view on PVC for next year?

[Albert Chao, executive]

I think -- but at least the U.S. market PVC demand were impacted by both domestic housing construction and as well as global economy, as you know, about 1/3 of the U.S. production PVC are exported and being at that ratio for quite a while. So -- and the U.S. has the lowest cost to produce PVC in the world. We are benefit from low-cost natural gas for generating power for making chlor-alkali and low-cost natural gas for producing ethane, which is predominant feedstock for U.S. ethylene producers. And half of PVC is ethylene and half is chlorine. And so we have the lowest cost producer in the world to produce PVC, and we can export anywhere in the world and compete.

The issue then is margin. And China, one thing is going on is that the Chinese government are moving less or less in the carbide, about 80% of the Chinese capacities are carbide coal-based, which is high cost and high polluting process and the Chinese government having curtailment of any new capacities in carbide process and switch into ethylene-based PVC production, which comes at a higher cost because ethylene in China is all based on naphtha, which comes from cracking refining oil. So the cost base is higher. And so they are less able to compete on a global basis. So from that sense, again, our U.S.-based producers are much better positioned to compete globally against even Chinese exports. So at the end is the global economy and China construction activity is a big part of the Chinese economy and is really going through a recession right now. So until the construction and housing activity in China improves, we are going to see improvements in profitability in the vinyl business in China either. Which should impact the rest of the world as well.

[Kevin McCarthy, analyst]

And then Steve, I had maybe 2 housekeeping ones for you. Apologies if I missed it, but how did the $50 million FIFO headwinds that you referenced split between your segments? And also curious, do you have any fourth quarter maintenance turnarounds planned?

[M. Bender, executive]

Yes. And so about 3/4 of that is in PIM, Kevin. And your second question was -- tell me again?

[Kevin McCarthy, analyst]

Are you planning to turn around any of your manufacturing plants in the current quarter?

[M. Bender, executive]

In the current quarter, only small activity from a maintenance level perspective, our bigger activity will be in '24 when we have a ethylene turnaround in '24. But otherwise, in the fourth quarter, it's really small maintenance activity not attributable to any significant turnaround levels.

[Operator]

Our next question comes from the line of Josh Spector from UBS.

[Christopher Perrella, analyst]

It's Chris Perrella on for Josh. Just following the guidance for hip for the fourth quarter. What's causing the having of margin sequentially? Is that higher raw material costs? And is that final headwinds? What are the moving pieces, I guess, up in the third quarter on the margin and then down in the fourth quarter sequentially there?

[M. Bender, executive]

Yes. A big piece of that headwind is really attributable to seasonal slowdown and so a diminished demand level. We're also seeing -- since we are a FIFO reporter some of that costs will also roll through that will roll through in the fourth quarter in terms of some of the feedstock costs will come through as well. And of course, the compounding of interest rates that we've seen will continue to be a headwind in terms of affordability. So it's a combination of those factors.

[Christopher Perrella, analyst]

All right. I appreciate that, Steve. And then just one quick follow-up on the caustic soda. Albert and Steve, I'd just like to hear your thoughts on the caustic soda market as we move through the year given the weaker demand outlook for PVC?

[Albert Chao, executive]

Yes. caustic soda, generally, the global demand correlates well with the global GDP growth and global GDP is really not doing that well. So this year, we have experienced price declines almost every month of the year. And I think at least the consultants are saying that after the price erosion of this year, I think they're expecting another $20 for November and December to drop. But next year, there will be more stable and more price increases coming up. How all this subject to global economic demand, and it's hard to forecast these days.

[Operator]

Our next question comes from the line of Hassan Ahmed from Alembic Global Advisors.

[Hassan Ahmed, analyst]

Wanted to revisit one of the earlier questions around chlor-alkali supply-demand fundamentals, particularly as they relate to your views on what ECU pricing and margins will do on a go-forward basis. Look, I mean, the issue pricing and margins have obviously come down over the last couple of quarters. But one of your larger competitors over the last few years has shut down a fair bit of capacity and has recently announced the temporary idling of some capacity as well. And they were very vocal in saying that by the second quarter of 2024, they expect to see a positive inflection on the ECU pricing and margin side of it. So are your views in agreement with that?

[Albert Chao, executive]

Yes. Yes, generally speaking, we agree. Westlake, because of our historical strategy of being more fully integrated. We have downstream manufacturing of chlorine to PVC and then also further integration to hit businesses. So we have a lot more channel to sell products both domestically and export along the whole vinyls chain, which help us to moderate our operations, everything else. So as we explained earlier, the last quarter, the value chain really has moved down to the downstream HIP business. And since we have, as mentioned, price declines for caustic throughout this whole year and consultant forecast is much more stable and actually improving prices for next year we're expecting things to get better.

Now this is subject to global economic conditions. We don't know what's going to happen with high interest rate. We're still seeing feeling the impact of high interest rate, which -- until that reverses, we'll have a detrimental effect on demand, both in the U.S. and overseas as well.

[Hassan Ahmed, analyst]

Fair enough. Fair enough. And as a follow-up, Albert, I mean, we still seem to be living through some unprecedented times. The destock across a variety of sort of chemical product chains, including yours, has been quite severe 2022 onwards? And if we were to simplistically sort of put that into historical context, obviously, a massive destock cycle like the one we've seen is followed by a pretty impressive restock cycle, right? But I mean, is it fair to assume that on a go-forward basis, we may actually eventually see a pretty impressive restock cycle? Or now with rates where they are, with housing doing what it's doing with China, doing what it's doing, are we in a new sort of paradigm shift?

[Albert Chao, executive]

Absolutely. I think as you mentioned, we've been seeing destocking pretty much through the whole year. And I think most companies we mentioned earlier, the destocking activity is over. The question is what is the true demand. And people are really -- because high interest rates, high inventory costs are expensive to carry, people are really ordering what they need. The issue is their need changes. So -- and they don't know they're very short-term oriented now. And so as demand came down, we have more ability to serve. As you know, back in 2022, if our HIP business, we have a backlog over a year of certain products, and that's not good for our customers. So now, by and large, most of our businesses we are ready to serve our customers in a relatively short notice. So we as a producer, we carry a bit more inventory to serve our customers and which also benefits from any import competition in the businesses.

But having said it, is that we don't know -- a customer don't know what is the true demand and we are ordering -- they're ordering as only they need and we're supplying them. And as you said, when the market turns and they want more of a reasonable higher level inventory then will be a multiply effect if that you can say that to production in the future. But who knows when that market turn will be -- on the housing side, generally speaking, springtime, which start probably February, March is when people are seeing benefits of the weather and they start putting sticks in the ground and do that. So we should see some signs of improvement on housing in February, March related. But who knows time will tell.

[Operator]

[Operator Instructions] Our next question comes from the line of Michael Sison from Wells Fargo.

[Michael Sison, analyst]

Guys, can you hear me?

[M. Bender, executive]

Yes, we can Mike.

[Michael Sison, analyst]

However, what do you think you're going to run your chlor-alkali facilities in the fourth quarter in terms of the operating rate? And how do you think about that as you head into next year if demand continues to be sort of challenged?

[Albert Chao, executive]

Yes. Our operating rate pretty much follows the industry operating rates, and as mentioned earlier, generally, the demand goes down in the fourth quarter and the first quarter. So our industry operating rate tends to go down and picks up again in the second and third quarter. And this is the general pattern. And of course, as Steve mentioned, we have not only seasonality, but also impact of high interest rate on the demand for construction activities. So those are compounded effects.

[Michael Sison, analyst]

Got it. And then if -- when you think about PVC demand in 2024, if demand weakens as you head into '24, how do you think you run your facilities to sort of compensate for that? Will you pull back some capacity or just sort of run it as in?

[Albert Chao, executive]

Yes. The industry has pulled back -- we have pulled back capacities when the demand is not there. But as I mentioned, that in the bio industry, we are one of the more fully integrated companies going for [indiscernible] from making ethylene and chlorine down to making pipes, windows and siding and compounds. And to further go down, the more easy for you to reach out the broader customer base. And for PVC resin, we don't export much HIP business, but PVC resins mentioned the industry exports about 35% of production. And we are the lowest cost producer in the world for PVC. We've been American bio producers. So on the margin is good enough. In our industry will export PBC, and we'll also benefit the upstream chlorine, ethylene side.

[Operator]

Our final question comes from the line of Arun Viswanathan from RBC Capital Markets.

[Arun Viswanathan, analyst]

So I guess my first question -- I have 2 questions. So first question is on HIP. When you, I think, discussed this segment in the past, you've noted kind of a 15% to 20% EBITDA margin range. You've done very well in executing here. And do you think that's still the appropriate range to consider? And could you potentially go well beyond that range in a higher volume environment? I'll start with that.

[M. Bender, executive]

And so Arun, when we think about the demand environment we've been in, we've been guiding to kind of the upper teens, and you see that we've exceeded that in a couple of quarters. This quarter was a record quarter with 29. But I think in a much stronger demand environment, given the fact that we've got a very broad product offering, there is a potential for that. But I think as we've seen here, we've got to see a much stronger demand market to be able to then move margins and pricing up. We've got a very strong headwind currently with seasonality coming into play and with mortgage rates, 8% plus for 30-year mortgages, that's quite a bit of a sticker shock for most home buyers. And so to be able to get a better -- a tighter market, if you will, we need a much better backdrop in terms of affordability and a more constructive macroeconomic outlook. There's a lot of uncertainty in the market these days, and that's causing a lot of people to be cautious about deploying personal capital into repair and remodeling and other construction. But yes, there is potential, but we need a better macroeconomic backdrop.

[Arun Viswanathan, analyst]

Okay. And just on PIM as well, another question I had was, I think you touched on the footprint on chlor-alkali, your operating rates kind of following the industry. But what about Epoxy? I mean do you think that there's further rationalization required there just given the weakness that we've experienced over the last couple of years? What's it going to take to really see a better market there, understanding that China appears to be the biggest driver, but could there also be some capacity reductions on your part that would that accelerate that?

[Albert Chao, executive]

Yes, that's a good question. As [indiscernible] we discussed earlier that there's over capacity in the world. I think China build a lot capacity for their anticipation of demand for both EV, lightweighting cars, wind mills, generating the renewal power. So that's the reason why China has built up capacity. But for one of the reasons the EV demand is not going that strong, I think adoption still takes a while globally, and China is exporting EV customer in the world and meeting competition. At the same time, the renewal power, the windmill blades, the various activities going on even in the U.S. and Europe, people won't do it, but the cost increases and all these issues are impacting the pace of further development in wind mills, we think will come. And Westlake, we have technology that can make over 100-meter alarm blade, the longer the blade, the better the properties or efficiency of the wind mills.

So this takes time. And I think trying some of the older plants in China are not integrated plants running low rates or shut down. So just like anything, it will be rationalization going on and it takes time. But I think the demand for epoxy globally is still very strong. That especially in the U.S., you have infrastructure rebuild bridges and ship and so on and so forth. And they all need coatings, car, these coatings. And the way mill blades and epoxies and electronics. So the global demand for epoxy were very optimistic on long-term demand. I think short term, we have these issues to go through. And I think the industry will go through that.

[Operator]

At this time, the Q&A session has now ended. Are there any closing remarks, Jeff?

[Jeff Holy, executive]

Thank you again for participating in today's call. We hope you'll join us again for our next conference call to discuss our fourth quarter and year-end 2023 results.

[Operator]

Thank you for participating in today's Westlake Corporation Third Quarter Conference Call. As a reminder, this call will be available for replay beginning 2 hours after the call has ended. The replay can be accessed via Westlake's website. Goodbye.